Global asset manager Ashburton Investments, which has a sizable investment in Infosys Ltd. is closely watching the latest developments in the company after the exit of its Managing Director and Chief Executive Officer Vishal Sikka.
While the firm has not pared its Infosys holding as on Friday, it is weighing its options, Chief Investment Officer Jonathan Schiessl said on BloombergQuint’s weekly series, Thank God It’s Friday. Infosys constituted 7.5 percent of Ashburton's Indian Equity Opportunity Fund as on July 31, Bloomberg data shows.
Here are edited excerpts from the conversation.
Is the intervention by the co-founders a negative for the Infosys stock? How will foreign investors perceive the ongoing developments at Infosys?
Infosys needed this sort of ‘hole in the head’. It has been rumbling for some time. It’s fascinating as an aside..if you look at Infosys being one of India’s titan companies but you also look at corporate governance issues and issues between founders [and the board].
From our perspective, as holders of the stock, it’s a very difficult decision we have to make. On the one hand, there is no doubt that with what’s happened, it’s going to be extremely difficult to get a high calibre candidate in place who will have the confidence that they could do the job without constant interference or constant noise coming from potentially the founders of the company. So, that’s the negative - who will replace the current MD and CEO. That’ll lead to a period of disruption and that’s certainly not wonderful. At a time with everything going on in the global economy, you need strong leadership. So, that’s a negative. On the other side, look at the valuations. The stock has come down to the Rs 900 level a few times in the last six months. It’s found support at the Rs 900 level which it breached today.
Also, you have the announcement of a potential buyback which is going to be ratified in the next few weeks. There are a lot of negatives, undoubtedly, in the shorter medium term. But in the short time, there is some valuation support down, particularly with a potentially reasonably sized buyback coming through.
Adding Other IT Stocks?
Would you consider increasing your allocation in some other information technology stocks?
We have been doing that for the last three-four months, slowly increasing our allocation to IT. There are various factors at play there. Yes, the currency has been a headwind for some time. That won’t change anytime soon. From the sector which is relatively under-loved, from a sector where in the broader market where you are struggling to find value, there certainly are pockets of value within IT. As volatility rises, yes, the Infosys news will add to volatility in the sector. Broadly speaking, with increasing global volatility, you would have expected that the IT sector will hold up relatively well because it has got valuation support, but also not everybody is crowded into that one area. So we have been upping the weight slightly to our IT holdings, perhaps a bit early. It’s not been working so far but we do find value in some of the counters there.
Caution Returning To U.S. Markets?
Should we see some instability in the political scenario in the U.S., what will it mean for American markets and global markets?
We have been grappling with this idea from some time. For risk assets in particular, equity markets have been roaring and up ever since Trump was elected. It’s been interesting because there are some different signals out there. On the one hand, equity investors have bought into the Trump idea of reflation trade. That Trump was going to get tax reform and the U.S. economy going again. It’s interesting that the Fed a few months back said they would like to see evidence of that before they change their policy. We are also more cautious about the chances of Trump delivering on some of his promises. The reality now, one of the reasons why equity markets in U.S. had a nasty day yesterday is perhaps some equity investors might be beginning to reappraise the idea that the Trump agenda can get pushed through. In the White House at the moment, it’s going to be very difficult for him push through more business-oriented reform. As doubts creep in, potentially the markets could come under some pressure, more volatility. We have got geopolitical issues globally as well which is adding another level of uncertainty. But the Trump side is adding caution, rightly so.
‘Indian Overweights Reduced’
What’s your perspective on the India growth story and what according to you are the biggest challenges facing the Indian market?
We are extremely optimistic, broadly speaking, on the India story. The negative is valuations. There are other factors like flow. We have seen a huge pickup in domestic flows into the market which has certainly helped. The other negative is the supply. So, we are seeing a massive deluge of IPOs, secondary offerings coming through which is sucking out some of that flow into the market. From foreign investors’ perspective, the India story still continues to stand out. Analysts would love for it to be a little bit cheaper. From the data I see, it looks like the consensus overweights on India among foreign investors have come down since the beginning of the year. There has been a slight reduction in Indian overweight amongst the emerging markets. But India is still a well-liked and well-loved story.
A lot of foreign investors, though, struggle with the valuation side and they have also been waiting for a selloff to increase allocations. So, if you get a bit of volatility coming through and indices come off a little bit, you could see foreign investors pump more money back into India. To our thinking, the biggest issues around India and maintaining index levels and where it can go from here are probably still international as opposed to domestic. On the domestic side, it seems like the monsoon is progressing reasonably well. But there are some geopolitical issues with China at the border which continues to rumble and does worry some people. And Modi does look very strong from an Indian the political perspective.
The Job Creation Hurdle
Economic growth is not being able to create enough jobs. Is that a concern that should worry investors and does that have implications for consumption-related investments?
We have been worrying about that from some time. There is a huge hurdle within India to create jobs and, particularly, jobs in the organised sector. It’s difficult to track what’s going on in the unorganised sector. Government policies more recently – demonetisation, GST – have created more headwinds from an investment perspective as well in certain sectors. The economy is suffering from the after effects of the non-performing loans problem in the banking system. That hasn’t been worked through yet. And, as we have said for some time, it’s the uneven recovery that seems to continue. It isn’t a broad-based recovery that we are seeing.
For the time being, that will be an issue...this jobless recovery that we are seeing. The stress in the rural sector too is another worrisome factor, particularly for rural labour. This is not something that India can fix overnight. The Make in India push, the massive increase in foreign direct investment (FDI) will lead to new jobs in the organised sector. But it will take, to our mind, years as opposed to months.
‘Hindalco Back In Portfolio’
What have you been doing with your Indian portfolio holdings in the last 1-2 months? Which are the areas where you have been increasing or reducing exposure?
We haven’t made too many radical changes. We have been tinkering around with the IT weights and slightly increasing it. We have, since the last 3-4 months, been reducing some of the domestic consumption, particularly consumer-focused sectors where valuations were beginning to get very punchy. To our mind, they have gotten even punchier. We have been a little bit early perhaps. A lot of investors are crowded into certain of those domestic consumption stories. It’s very difficult to justify valuations where they are currently in some counters, even in the medium to longer term. We, as a team, are quite prepared to pay reasonable high valuations for the stocks in the short term, as long as we see earnings coming in the medium to longer term when you start justifying the shorter-term valuations. To our mind, even with this wonderful consumption story that India offers investors, some of the prices in some of the sectors and counters are implying growth rates in perpetuity which are difficult to deliver. That said, quality stocks will carry on remaining expensive. We are not saying there will be a derating in some of the names. We just think that it has better value in other pockets of the market. We slightly re-focused some attention away from the consumer names and we pushed it back into more cyclically geared names.
We’ve being looking at some of the metals names. Hindalco, we have recently re-introduced into the portfolio a few months back. That has been working well. We do believe a recovery in India will come through in the next 6-12 months. It’s not going to be a profoundly strong one. But we will see evidence of more recovery in India in the year ahead.